On Thursday, December 15, 2011, the SEC appealed the Opinion and Order issued on November 28, 2011 by Judge Jed Rakoff rejecting the SEC’s proposed settlement with Citigroup Global Markets for $285 million (previously discussed here). In a statement, the Director of the Division of Enforcement, Robert Khuzami said that Judge Rakoff "committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits."

In rejecting the settlement, Judge Rakoff found "that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." Instead, he suggested that the SEC was hoping for "a quick headline," ruled that the SEC had argued the wrong legal standard, criticized the Commission’s policy of accepting settlements without an admission of liability as "hallowed by history, but not by reason," and called the Commission’s request that the Court assert its authority without knowing the facts "worse than mindless, it is inherently dangerous." Judge Rakoff consolidated the case with a related matter, SEC v. Stoker , No. 11-civ-7388 (S.D.N.Y. Filed Oct. 19, 2011), and set a trial date of July 16, 2012.

Even before Judge Rakoff’s ruling, some legal scholars thought that the parties were likely to renegotiate, with Citigroup having to pay a higher amount to settle, as discussed here. Immediately after the ruling, as discussed here, Mr. Khuzami, said that the SEC respected the opinion, but it would "continue to review the court’s ruling and take those steps that best serve the interests of investors." He also claimed that Judge Rakoff "ignore[d] decades of established practice throughout federal agencies and decisions of the federal courts."

Thursday’s Notice of Appeal and Mr. Khuzami’s statement reveal that the Commission was not prepared to allow the Court to undo its long-established approach to settling matters (and in particular, the policy of allowing a defendant to settle without admitting or denying the facts) without a challenge. Mr. Khuzami elaborated:

We believe the court was incorrect in requiring an admission of facts – or a trial – as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. Indeed, in the case against Citigroup, the SEC filed suit after a thorough investigation, the findings of which were described in extensive detail in a 21-page complaint.

The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.

Mr. Khuzami also defended the settlement against Judge Rakoff’s criticisms regarding the amount of the settlement and the benefit to investors ("this is a very good deal for Citigroup … it is a mild and modest cost of doing business" and the SEC only promised that it "may" return the $285 million settlement to investors). Director Khuzami stated that "[i]n cases such as this, a settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount."

Mr. Khuzami further pointed out that Judge Rakoff’s ruling "could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors." If Courts require the SEC to secure an admission before approving settlements, defendants may have no choice but to fight it out – an admission can be used against the defendant in related private litigation resulting in additional liability.

Mr. Khuzami made it clear that the SEC is "fully prepared to refuse to settle and proceed to trial when proposed settlements fail to achieve the right outcome for investors." The filing of the Notice of Appeal reflects that, despite Judge Rakoff’s criticism, the SEC still sees the Citigroup settlement as the "right outcome." As a result, one of the issues before the Second Circuit Court of Appeals will be who decides what is the right outcome for investors.